Yahoo Finance Why there are no simple solutions to Social Security's problems: Allan Sloan
One of the most popular parlor games in our nation’s capital is called, "How to Fix Social Security."
Monthly Social Security checks provide 50% or more of the income for about two-thirds of beneficiaries 65 and up. For one third of them, Social Security checks are 90% or more of their income. And as you likely know, the Social Security trust fund is running out of money.
Unless it's fixed, Social Security won’t be able to pay full benefits in about 10 years. The payouts will fall by more than 20%, which would inflict massive financial harm on millions of people. Allowing that to happen is unthinkable.
Why am I calling this a parlor game? Because the program and its financing are very complicated, and the proposals that have surfaced so far about how to fix the financially fragile system largely amount to simple and unserious one-stop shopping.
As someone who’s written about Social Security for decades, and who paid the maximum Social Security contribution for more than 35 years and is currently a Social Security beneficiary, I know that simple proposals make for good politics, good soundbites, and good campaign speeches. But they won’t solve the problem.
Why? Because the only fix, short of giving Social Security its own printing press to create the dollars it needs to pay its promised benefits, requires sacrifices by people of retirement age like me, our kids, our grandkids, and generations yet unborn.
A fix requires Republicans and Democrats to cooperate with each other, behave like grown-ups, and deal with the problem rather than defer it. These days, alas, nothing like that is on the horizon.
So let me try to explain to you what’s going on, and why simple-sounding solutions—such as, “Raise trillions by taxing every penny of income that the filthy rich take in!” and, “Stop those lazy moochers from taking early retirement!” — are simplistic, not simple.
Raising the cap without raising benefits would backfire
Social Security’s financial structure and benefit calculation formula are massively complex. The program’s 12.4% tax, which is the highest tax on income that most employed people pay, is nominally split 50-50 between employer and employee. However, most people who deal with the system, including me, assume that even though employers fork over half of that 12.4%, it’s money that would otherwise go to employees.
Currently, the maximum amount of earned income on which Social Security tax is collected (and on which benefits are based) is $160,200 a year, a number that only a relative handful of people exceed. That max-tax amount is adjusted annually for inflation.
One of the favorite liberal solutions to Social Security’s financial problems is to eliminate the wage cap entirely but give people who earn more than the cap no benefits above the current formula. This would add 12.4% to their tax bill but give them nothing in return.
It would reduce political support for Social Security among these influential, wealthy people and might even encourage them to convert their taxable earned income into lower-taxed investment income.
Raising the cap is a little tricky — but it’s really important.
According to Social Security’s chief actuary, Steve Goss, the biggest reason the 1983 Social Security reforms haven’t had their desired effect is that the amount of earned income subject to Social Security tax has fallen to 82.5% from the 90% it was four decades ago.
That’s because the earned income (salaries, bonuses and such) of higher-income people has increased much more rapidly than income for lower income people.
What would be involved in getting Social Security coverage back to 90% of earned income? It turns out it would require doubling the taxable maximum from what it is now. I know that seems like a lot, but don’t ask me to explain why that is. It’s another example of why Social Security is so complicated it can make your head hurt.
Raising the retirement age
Raising the retirement age would be helpful because people would be working longer, paying more into Social Security, and drawing benefits for fewer years. It's a solution often championed by Republicans.
But just as raising the wage cap without raising benefits is unfair, it would be unfair to force people —especially low-earning people doing physically difficult jobs — to work years longer to qualify for benefits.
The obvious way to fix the problem is with a combination of tweaks. Raise the covered wage amount. Tweak the benefit formula to reduce payments to max earners below the current formula, increase benefits for lower earners, and very gradually raise the retirement age.
Another interesting idea is to make some investment income subject to Social Security tax. Or possibly to raise the amount on which employers pay Social Security tax above the wage cap but not force employees to pay the matching 6.2% tax.
As luck would have it, you can mix or match dozens of possible solutions by looking at proposals that the Social Security Administration has been publishing since 2005.
Take a look at some of those proposals and you begin to see how complicated fixing Social Security is.
I’d love to be able to offer a simple one-fix or two-fix solution that will solve Social Security’s financial problems. But I can’t, because no such solution exists.
We’ll have to do what we did 40 years ago and set up a bipartisan commission, like the 1980s' Greenspan Commission, to increase Social Security revenues, slow the growth in payments, and do various other things to get the problem under control.
But I won’t hold my breath waiting for that to happen. And neither should you.
Update 8/2/2023: A previous version of this story misstated the proportion of income Social Security provides to beneficiaries 65 and up.
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